Sorry, you have not enabled Javascript for your internet browser, so some of our website's pages may not render as fully as intended.Please Click here for easy instructions on how to enable Javascript on your browser or consult your IT support staff for help.

Keep up to date with a free subscription, courtesy of HSBC

In dire straits

The US State Department moved a step closer to selling $330 million worth of new military equipment, mainly aircraft, to Taiwan last month when the planned sale was given congressional approval.

This would mark the second major arms sale to the island since Donald Trump became president. But it’s a drop in the ocean according to the think-tank Rand Corp, which says that Taiwan should be spending $25 billion more on weapons, mostly from the US, if it wants to better defend itself.

The sale prompted a formal protest to Washington from Beijing, which demanded that the deal be cancelled. But Taiwan’s media described the situation more as a diplomatic game, pointing out that the Americans have been reluctant to sell Taipei the highest-spec weapons that would make a real difference in defence capability.

Why is that? Probably because the Pentagon is concerned that mainland spies might steal their military secrets. A case in point: in the 1980s Taiwan started a development programme for an Indigenous Defence Fighter with US help, only for the project to be abandoned in 2000 on fears that know-how could be leaked to the mainland.

Similar thinking seemed to be at play last month when Taiwanese chipmaker United Microelectronics Corp (UMC) was caught in the crossfire of the trade and tech spats darkening relations between Washington and Beijing.

On October 29, the US Department of Commerce slapped a ban on China’s Fujian Jinhua Integrated Circuit, barring American firms from selling its components to the state-owned chipmaker and warning that it posed a “significant risk” to American national security.

Founded in 2016, Jinhua is one of the key players in the mission to reduce China’s reliance on foreign semiconductors. Its $5.7 billion factory in the coastal city of Jinjiang is close to commencing operations but the latest sanctions from Washington risk it suffering the same fate as ZTE, whose operations were brought to a virtual standstill by a similar ban (see WiC406).

The US government decision came as Jinhua, along with UMC and three more Taiwanese executives, were indicted by the Justice Department for conspiring to steal secrets from American semiconductor company Micron Technology.

The charges relate to Micron’smemory storage devices (DRAM). In 2017 it took Jinhua and its Taiwanese partner to court for theft of trade secrets. According to Micron’s complaint, UMC was to receive $700 million in research and development funding from Jinhua, together with co-ownership in the resulting technology.

Jinhua counters that it has invested heavily in its own R&D programme and has little need of stealing technology from others. UMC has also denied any wrongdoing, although it says it will suspend its R&D work with Jinhua.

Taiwanese firms such as UMC have been working with mainland firms in exchange for access to the vast China market. According to Reuters, at least 10 joint ventures or technology exchanges have been set up across the Taiwan Strait, counting as some of “the most valuable cross-strait partnerships”.

Any decision from Washington to cut off supplies to more of the Chinese chipmakers would create a quandary for Taiwanese firms with business ties to the mainland. This latest move, says Taiwan’s United Daily News, is an example of the classic proverb: “killing the chicken” [in this case UMC] to “warn the monkey” [other Taiwanese semiconductor firms].

China’s state-run media was suitably unimpressed, arguing that the latest American embargo will only stiffen the country’s determination to develop its own semiconductor capabilities. “To break the blockade, China needs to be more deeply integrated in the global innovation community,” the Global Times demanded.

More broadly, former US treasury secretary Hank Paulson warned this week of an “economic iron curtain” if the two countries don’t do more to resolve their differences.

The Week in China website and the weekly magazine publications are owned
and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is
involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these
publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will
therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.